With no immediate relief in sight from sky-high ocean container freight rates, shippers are faced with the question of how to negotiate with carriers for adequate capacity at a manageable price.
Container lines are taking full advantage of the capacity crunch and increasing congestion at major ports and inland terminals, giving them free rein to jack up freight rates to unprecedented levels.
It’s a sharp reversal of the many years during which carriers were unable to sustain rate increases due to the power of big shippers in times of substantial overcapacity (a situation engendered by the carriers themselves, who insisted on building ever-larger containerships).
“It’s their time to make money,” said Patrik Berglund, chief executive officer and co-founder of Xeneta, provider of a freight-rate benchmarking and market analytics platform for ocean and air transport. Speaking at the TPM22 conference late last month in Long Beach, California, he said that “there hasn’t been profitability [in container shipping] for a long time.”
“If you were able to charge 50% to 80% more for your commodity, wouldn’t you?” asked Lawrence Burns, founder and president of Lawrence Burns Consulting. But even at those levels, he said at TPM22, carriers haven’t raised rates “to the point of being completely irresponsible.”
President Biden disagrees, haven’t specifically called out container lines for rate gouging in his State of the Union message. Accusing carriers of acting as a “cartel,” Biden vowed to take action against “unjust and unreasonable” fees through the power of the Federal Maritime Commission and Department of Justice.
Other speakers at TPM22 questioned the President’s ability to do that under current law. FMC chairman Daniel Maffei acknowledged shipper complaints about “the rapid inflation of rates and decline of reliability of service.” If that state of affairs were shown to be the result of collusion among carriers, he said, FMC could take legal action. So far, though, the commission has found “no evidence of anything that’s actionable.” Nor have regulators in the European Union or China. Current agreements between carriers relate to the sharing of space on one another’s ships, not setting rates collectively.
Nevertheless, shippers have accused carriers of deliberately withholding capacity to pump up rates. In fact, carriers have repeatedly cancelled sailings in recent months in response to port congestion and the fallout from the COVID-19 pandemic. But Maffei pointed out that they’ve actually added net capacity in the trades — a major reason why there are so many ships stuck outside the ports of Los Angeles and Long Beach, waiting days or even weeks to unload their cargo.
Carriers’ record profits are “mostly due to incredible demand for shipping services,” Maffei said, calling the rate increases of the last couple of years a function of the free market. In such an environment, he added, FMC has no authority to set or cap rates, notwithstanding Biden’s call for rate relief on behalf of shippers.
That picture isn’t likely to change anytime soon. The proposed Ocean Shipping Reform Act of 2021, now being considered in Congress, could bring shippers some relief, but it doesn’t grant FMC the power to regulate rates or prioritize one class of shippers over another, Maffei noted.
That’s of little comfort to smaller shippers, many of whom are frustrated over their inability to secure promises of adequate ship space, as well as carriers’ refusal to honor the terms of service contracts when they do. “I certainly see carrier leverage,” Becky Wu-Lee, senior manager of logistics and compliance with Igloo Products Corp., told TPM22. “As long as it’s not to the point of threatening that they won’t load you at all.” Wu-Lee called Igloo’s recent experience with ocean carriers “an eternal battle on a day-in and day-out basis.”
Mary McNelly, senior director of global logistics and supply chain design with footwear manufacturer Crocs Inc., echoed that sentiment. She spoke of being awarded service contracts, only to be told subsequently that carriers could support a portion of their capacity commitment.
“The gut punches kept coming,” McNelly recalled, causing Crocs to change its whole negotiating strategy and seek three-year service contracts in hopes of garnering carrier loyalty. That’s an uncommon approach for a small to medium-sized shipper, she acknowledged, but it was necessary in order for Crocs to be considered a “customer of choice.”
In fact, Crocs ended up placing a portion of its business under multi-year contracts, while keeping the remainder on one-year contracts, utilizing both direct deals with shipping lines and those obtained through non-vessel operating common carriers.
With the current balance of power in the ocean trades favoring service providers, it’s up to shippers to ingratiate themselves with carriers. Burns said shippers looking to secure minimum quantity commitments (MQCs) from carriers should strive for consistency in the amount of business they tender, turn equipment around quickly, and pay on time. Having built up a history of good behavior, they can then ask carriers: “Based on my attractiveness, will you add volume to my contract?”
In times of such high uncertainty, however, the “all-eggs-in-one-basket” approach to dealing with carriers might not be the best choice after all. Thorsten Meincke, member of the board of management for air and ocean freight with DB Schenker, recommended that shippers seek multiple contracts on every port pair, in order to shield themselves against blank sailings.
All of which leaves shippers in a quandary about how best to negotiate with carriers from a position of weakness. Speakers at TPM22 expressed hope of rates leveling off at some point. “I agree that current levels are unsustainable,” said Vincent Clerc, chief executive officer for ocean and logistics with A.P. Moller-Maersk, currently the second-largest container line in the world. “I expect normalization around the middle of this year.”
But the longer-term problem, one that will require a significant market shift and possibly legislation to solve, concerns the unreliability of ocean shipping service contracts, regardless of their terms and conditions. Carriers and shippers alike routinely walk away from volume commitments that were hammered out in prolonged negotiations. Said Simon Munn, vice president FCL (full containerload) product Americas with DHL Global Forwarding: “The typical ocean contract is not worth the paper it’s printed on.”
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